The US will lend $20bn to Ukraine as part of a $50bn G7 loan, to be repaid from the interest earned on frozen Russian sovereign assets, raising hopes in Ukraine of a bigger prize — that the assets themselves be handed over to Ukraine.
The US said on Wednesday it would move forward with the loan without the legal changes to EU sanctions it originally asked for, but it will continue to push for those changes.
The EU earlier this week agreed to provide up to €35bn for the G7 loan, but that will be reduced to match the US’s commitment. The UK this week announced its contribution of $3bn.
Andriy Pyshnyy, governor of the National Bank of Ukraine, told GlobalMarkets: “This is a huge shift in understanding, that these frozen assets should be used to compensate for Ukraine’s losses.”
He underlined that Ukraine wanted a further, more radical step: using the $300bn principal of Russian reserves frozen in the West to pay for damage to Ukraine.
“Ukraine has always said that the immobilised Russian assets should be used to compensate Ukraine’s losses and damages,” said Pyshnyy. “We see the loan as a first step on this way, and we will keep working with our partners to convince them.”
Yuriy Butsa, government commissioner for public debt management at Ukraine’s Ministry of Finance, had told GlobalMarkets on Wednesday, before the US announcement, that he was hoping a US contribution to the loan equal to the EU’s would be strong enough to prompt agreement among Ukraine’s allies to let it use the Russian money.
“Those who create the damage should pay for it and our ultimate goal is for Russian frozen assets themselves to be transferred to rebuild Ukraine,” Butsa said. “This interim solution of a loan backed by future flows generated from those assets, which are legally not part of the assets themselves, moves us in the right direction.”
According to the World Bank, Russia’s war on Ukraine has already caused almost $500bn of damage. Pyshnyy said: “We critically need international support, because of the duration and cruelty of this war.”
Legal issues to overcome
But using Russian money remains controversial and legally difficult. Butsa said: “Given there were some concerns raised, including by some of the central banks of the world, it’s important that all the G7 countries participate in this facility, so that it is clear that this is a coordinated solution supported by all our partners.”
Daleep Singh, the White House deputy national security adviser for international economics, said in a briefing that the US expected to disburse at least half its $20bn loan to the World Bank Trust Fund this December, and “possibly the entire amount”.
This component of the loan had been under scrutiny, as the US had said it wanted the EU to change the renewal of its sanctions to every three years, from the current six months, to provide assurance that the flows backing the loan would remain in place.
But Hungary has refused to agree to this — depriving the EU of the necessary unanimity — until after the US presidential election.
The US has decided to go ahead without the changes for several reasons. Singh said the US saw reassurance in the EU Council’s release of statements that it would keep the Bank of Russia’s assets immobilised until there was a free and sovereign Ukraine.
He also said there was equal burden sharing between the US and EU, so both parties would have aligned incentives to keep the assets immobilised until the loan was repaid.
The US has also worked with Ukraine on loan agreements under which, at the conclusion of the war, Ukraine would use settlement proceeds from Russia towards repayment. Singh said the US had negotiated loan terms that further reduced risks to the US taxpayer.
He also pointed to history. The EU has had sanctions in place against Russia for almost 10 years, since it annexed Crimea and invaded eastern Ukraine in 2014.
“Every six months, those sanctions need EU unanimity to get rolled over for another six months,” Singh said. “And, yes, there’s grandstanding and drama, but the EU has built a track record of staying the course, and that adds to our confidence that Russia’s sovereign assets will remain immobilised until Russia ends its war and pays for the damages it’s caused.”
Butsa said the ideal proportions for the loan would be what is now being put in place: $20bn from the US, $20bn from the EU and $10bn from other partners such as the UK, Japan and Canada.
“The loan backed by the flows generated by the assets has been a feat of financial engineering,” said Butsa. “Using the assets themselves is more a legal than financial issue. But this topic was almost taboo two years ago and the discussions are ongoing around it now. We see it as a different track, but the same direction of travel.”
The White House stated clearly that the US did not see this loan as a seizure of Russian assets. “The interest earned doesn’t belong to Russia but rather the custody [provider] in Belgium,” said Singh.
Butsa refused to comment explicitly on how the result of forthcoming elections in the US and EU countries such as Romania might affect Ukraine’s funding. He was clear that Ukraine was fighting not just for its own country but for democracy more broadly.
But he also recognises the obstacles elections can create and therefore sees urgency in having Ukraine’s financing in place as soon as possible.
“Elections result in a transition process, which affects decision-making,” he said. “So it is welcome when decisions are made regarding Ukraine funding prior to any election cycles.”
Talking before the US’s contribution to the G7 loan was announced, Butsa said that by the end of this week he hoped Ukraine would have financing in place that would not just see it through 2025 but give a clearer path through 2026.